Friday, February 23, 2018

Some Thoughts About Economic Exposition in Math and Words

Analysis in economics and other social sciences often uses a combination of words and mathematics. There is an ongoing critique by those who argue that while the math may sometimes be useful, it is too often deployed with insufficient regard for whether it captures the underlying economic reality. In such cases, the argument goes, math is used as a way of pretending that an argument about the real-world economy has been definitely made, or settled, when in reality only an equation of limited application has been solved.

Paul Romer recently offered a pithy commentary on this longstanding dispute on his blog. Romer quotes from an earlier post by Dani Rodrik, who in some lists of advice for economists and non-economists, includes the following:
"Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes. ... Unrealistic assumptions are OK; unrealistic critical assumptions are not OK. ...  Do not criticize an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic. ... Analysis requires simplicity; beware of incoherence that passes itself off as complexity. ... Do not let math scare you; economists use math not because they are smart, but because they are not smart enough."
Romer has in recent years expressed concerns over "mathiness," in which predetermined conclusions masquerade behind what looks like an "objective" mathematical model.  As he wrote in a 2015 paper:
"The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content. ... [M]athiness could do permanent damage because it takes costly effort to distinguish mathiness from mathematical theory." 
In his December blog post, Romer adds some rules of his own: 
1/ The test is whether math adds to or detracts from clarity and precision. A writer can use either the words of everyday language or the symbols from math to make assertions that are clear and precise; or opaque and vague.
2/ The deep problem is intent, not ability or skill.
3/ Writers who want to make predictions use words and math to be clear and precise. Writers who want to make excuses use words and math to be opaque and vague.
4/ Compared to words, math and code tend to be both more precise and more opaque ...
I might quibble a bit with his rule #2, because my sense is that many of those who fail to communicate clearly, whether in math or in words, either have simply not put the time and effort into doing so, or lack the ability/skill to do so. But at least for me, the notion that math is "both more precise and more opaque" than words is an insight worth keeping.

Romer's comment reminded me of an earlier set of rules from the great economist Alfred Marshall, who in his great Principles of Economics, published in 1890, and the standard textbook of economics for several decades thereafter, was quite careful about having almost all words in the text, with the underlying mathematics in footnotes. Marshall wrote in 1906 letter to Alfred Bowley (reprinted in A.C. Pigou (ed.), Memorials of Alfred Marshall, 1925 edition, quotation on p. 427): 
"But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics; and I went more and more on the rules -- (1) Use mathematics as a shorthand language; rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in 4, burn 3. This last I did often. ...
Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature -- and I have come across a good deal of that -- seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical ..."
As a final example of challenges that arise when mixing mathematics into economic situations, consider this definition of "logic" taken from Ambrose Bierce's (1906) The Devil's Dictionary:
LOGIC, n. The art of thinking and reasoning in strict accordance with the limitations and incapacities of the human misunderstanding. The basic of logic is the syllogism, consisting of a major and a minor premise and a conclusion— thus:
Major Premise: Sixty men can do a piece of work sixty times as quickly as one man.
Minor Premise: One man can dig a posthole in sixty seconds; therefore—
Conclusion: Sixty men can dig a posthole in one second.
This may be called the syllogism arithmetical, in which, by combining logic and mathematics, we obtain a double certainty and are twice blessed.
An awful lot of writing in economics combines logic and mathematics, and as Bierce would sarcastically say, we thus obtain "a double certainty and are twice blessed."

Thursday, February 22, 2018

A Grasshopper View: The 2018 Economic Report of the President

The Council of Economic Advisers was established by the Employment Act of 1946 as a separate office in the White House. Along with an ongoing stream of stream of reports and advice, the CEA also produces an annual report, and the 2018 Economic Report of the President  is now available. The CEA is headed by three political appointees, which is fine by me. I expect every president to choose appointees who are broadly in agreement with administration policies. My (often unrequited) hope is that the president will then actually listen to such experts on the dangers of likely tradeoffs and the details of policy design.

If you want to read the reasonable person's defense of Trump's economic policies--either because you want to support these policies or you want to rebut them--the Economic Report thus offers a useful starting point. For example, the first chapter is a defense of the Tax Cuts and Jobs Act (TCJA) passed in December 2017, and the second chapter is a defense of the Trump's regulatory policy efforts.  I tend to skim over such partisan arguments, but I still appreciate the figures and tables surrounding these arguments. They often describe facts and patterns worthy of note, whatever one's policy beliefs about the appropriate reaction to them.

In that spirit, I'll offer a grasshopper view of the report, leaping with no particular rhyme or reason between figures that caught my eye, with a few sentences quoted from the report about about each. Topics include: geographic mobility, road infrastructure, the US balance of trade since 1790, the fall in US manufacturing employment after 2000, the opioid epidemic, firms are investing less while paying out more to shareholders, and there is an international decline in labor productivity in the last decade or so.

The Fall of Geographic Mobility 

"High levels of unemployment concentrated in particular locations may amplify exit from the labor force, especially when workers are unwilling or unable to move to a location with a stronger job market. People move to improve their life circumstances, but the share of Americans moving has been declining, and is currently at its lowest value on record (figure 3-21).
"In addition to family and social connections, deterrents to moving include (1) search time, (2) State-specific occupational licensing requirements, (3) local land use regulations that raise housing costs in places with the greatest potential growth, and (4) homeowners’ limited ability to sell their homes. Such obstacles to finding better employment opportunities, coupled with high local unemployment rates, may lead employees to ultimately exit the workforce. More research is needed to determine the direct relationship between geographic immobility and labor force participation, specifically exploring whether obstacles to moving have increased over time, and how prime-age workers in particular have been affected."
More Driving on the Same Roads

"For example, between 1980 and 2016, vehicle miles traveled in the United States more than doubled, while public road mileage and lane miles rose by only 7 and 10 percent, respectively (figure 4-1). Unsurprisingly, queuing caused by traffic congestion has risen, imposing both direct and indirect costs on business and leisure travelers alike ..."

Swings in the US balance of trade since 1790

"Figure 5-7 illustrates the U.S. trade balance from 1790 to the present, expressed as a share of GDP. From 1790 through 1873, the U.S. trade balance was volatile, in part due to the low trade volumes (Lipsey 1994). The trade balance swung back and forth between surplus and deficit, but was mostly in deficit. From 1873 through the 1960s, the trade balance was mostly in surplus. The largest historic surpluses were during the years 1916–17 and 1943–44, as wartime production and trade with allies predominated. Since 1976, the trade balance has been continually in deficit. The largest deficit as a share of GDP was nearly 6 percent in 2006, a share exceeded in only six other years in U.S. history and not seen since 1816."
The sharp fall in manufacturing employment after 2000

"Although employment in the sector has long exhibited procyclicality, it has seen changes since 2000. In the expansionary period from the end of 2000 through 2007, the economy failed to recover the manufacturing job losses it experienced during the previous recession years."

The Opioid Epidemic

"And since 1999, over 350,000 people have died of opioid-involved drug overdoses, which is 87 percent of the 405,399 Americans killed in World War II (DeBruyne 2017). The staggering opioid death toll has pushed drug overdoses to the top of the list of leading causes of death for Americans under the age of 50 and has cut 2.5 months from the average American’s life expectancy (Dowell et al. 2017). ... 
"The opioid epidemic evolved with three successive waves of rising deaths due to different types of opioids, with each wave building on the earlier one (Ciccarone 2017). In the late 1990s, in response to claims that pain was undertreated and assurances from manufacturers that new opioid formulations were safe, the number of opioid prescriptions skyrocketed (CDC 2017b). What followed was an increase in the misuse of and deaths related to these prescriptions (figure 6-2). As providers became aware of the abuse potential and addictive nature of these drugs, prescription rates fell, after peaking in 2011. Deaths involving prescription opioids leveled off, but were followed by a rise in deaths from illicit opioids: heroin and fentanyl. Heroin deaths rose first, followed by a rise in deaths involving fentanyl—a synthetic opioid that is 30 to 50 times more potent than heroin and has legitimate medical uses but is increasingly being illicitly produced abroad (primarily in Mexico and China) and distributed in the U.S., alone or mixed with heroin. In 2015, males age 25 to 44 (a core group of the prime-age workers whose ages range from 25 to 54) had the highest heroin death rate, 13 per 100,000. Fentanyl-related deaths surpassed other opioid-related deaths in 2016."
Investment is down, while firms pay out more to shareholders

"It is a matter of concern that net investment has been generally falling as a share of the capital stock during the past 10 years, which limits the economy’s productive capacity. In 2016, net investment as a share of the capital stock fell to a level previously seen only during recessions (figure 8-10). The Tax Cuts and Jobs Act is designed to increase the pace of net investment. As discussed further below, the slowdown in investment has also exacerbated the slowdown in labor productivity growth. ...
"The rate of payouts to shareholders by nonfinancial firms, in the form of dividends together with net share buybacks, has been gradually trending higher for several decades, although it fell in 2017 (figure 8-11). Nonfinancial corporations returned nearly half the funds that could be used for investment to stockholders in 2017. In a well-functioning capital market, when mature firms do not have good investment opportunities, they should return funds to their stockholders, so the stockholders can invest these funds in young and growing firms. Although it may be admirable for individual firms to thus return funds to their shareholders, the rising share of paybacks to shareholders suggests that investable funds are not being adequately recycled to young and dynamic firms. GutiƩrrez and Philippon (2016) find that firms in industries with more concentration and more common ownership invest less."
The International Decline in Labor Productivity
"Labor productivity growth has been slowing in the major advanced economies (figure 8-41), driven by an estimated decline of 0.3 percent in annual multifactor productivity growth relative to average precrisis growth of 1 percent a year. This slowdown is broad-based, also affecting developing and emerging market economies. Although the causes of this productivity slowdown are unclear, a number of hypotheses have been offered—including financial crisis legacies, such as weak demand and lower capital investment; the trade slowdown; the aging of the post–World War II Baby Boom generation in its various forms around the world; the rising share of low-productivity firms; and a widening gap between high- and low-productivity firms. The Organization for Economic Cooperation and Development (OECD) finds that the survival of abnormally low-productivity firms may have contributed to the slowdown in productivity growth." 

Wednesday, February 21, 2018

Brainstorming Anti-Poverty Programs

There are legitimate concerns about how the poverty line is set. It was set back in the early 1960s and adjusted for inflation since then, but without regard for other changes in the economy. It doestn't vary according to regional differences in the cost of living and it doesn't include in-kind benefits like Medicaid and food stamps. It is based on income levels, rather than consumption levels (or see also  here). At least for a bloodless social scientist, it's possible to become focused on these conceptual issues to such an extent that basic empathy for those living with very low income levels gets crowded out. But just as one should remember that the poverty line is an arbitrary but useful convention, one should also remember that households living with very low income levels have a hard time.

Thus, it seems to me a  profoundly useful exercise, every now and then, to set aside the questions of how to measure poverty and instead to focus on what might be done about it. In that spirit, the Russell Sage Foundation Journal for the Social Sciences has put together a special double issue on the theme of  "Anti-poverty Policy Initiatives for the United States" (February 2018, vol 4, issues 2-3). After an overview essay by Lawrence M. Berger, Maria Cancian, and Katherine Magnuson, the two issues include 15 papers with a wide range of concrete proposals: focused on children in low-income families, the elderly, renters, food stamps, the earned income tax credit, the minimum wage, subsidizing or guaranteeing jobs, postsecondary training and higher education, contraception, and more.

There's a lot to contemplate in these issues, and I'll list the table of contents, with links to specific papers, below. A number of the papers are focused on how to adjust existing programs at a moderate cost. Here, I'll just sketch a couple of proposals that think much bigger. 

For example, a "universal child allowance" means that any household with children, regardless of income level, would receive a per child payment from the government. . Luke Shaefer, Sophie Collyer, Greg Duncan, Kathryn Edin, Irwin Garfinkel, David Harris, Timothy M. Smeeding, Jane Waldfogel, Christopher Wimer, Hirokazu Yoshikawa  lay out what such a proposal might look like in "A Universal Child Allowance: A Plan to Reduce Poverty and Income Instability Among Children in the United States."

The point out that the US has oriented much of it social safety net toward work, with the result that children in families where the adults don't work much can be very badly off. Their baseline proposal is to that every US family with a child  would be about $250 per month ($3,000 per year).  Because the allowance doesn't depend on income or hours worked, it is not reduced if an adult works more hours or gets higher pay. There is no need for a large bureaucracy to monitor eligibility and sliding-scale reductions in benefits.

Lots of other countries have enacted policies along these lines. They write (citations omitted):
Part of the reason that other nations have fewer poor children than the United States is that they provide what the OECD terms a universal child benefit—a cash grant that goes to all families with children. Austria, Canada, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, and the UK have all implemented a version of a child benefit. Some call their measures child allowances (CA). Others implement their CA through the tax code as universal child tax credits. A notable feature of these universal child benefit plans is that they are accessible to all: families with children receive them regardless of whether parents work and whatever their income. The level of these child benefits varies by country. The benefit in U.S. dollars for two children in Belgium and Germany is about $5,600 per year; in Ireland $4,000, and in the Netherlands $2,400 (. Canada has a base child allowance, in U.S. dollars, of roughly $5,000 per child under six and $4,300 per child age six to seventeen ...  
To pay for the allowances, they would start by scrapping the existing "$1,000 per child per year Child Tax Credit and a $4,000 per child per year tax exemption (often referred to as the child deduction)," which as they point out mostly go to families with incomes well above the poverty line." This saves $97 billion.  The total estimated cost of the baseline proposal about $190 billion, so the additional spending needed would be $93 billion. For those who are skeptical about whether the money would actually benefit children, the author point to a body of evidence that for low-income families in particular, available cash seems to make a real difference in many measures of well-being. 

Another aggressive proposal is that the federal government should guarantee a job to everyone who wants one. Mark Paul, William Darity Jr., Darrick Hamilton, and Khaing Zaw sketch a proposal long these lines, and respond to some of the common concerns, in "A Path to Ending Poverty by Way of Ending Unemployment: A Federal Job Guarantee." Their proposal is: "Any American wanting a job, at any time, would be able to obtain one through the public employment program."

Their proposal is that local, state and federal governments would "conduct an inventory of their needs and develop a jobs bank. ... At the federal level, we anticipate a wide array of major public investment activities, which may include fostering a transition to a green energy economy, extending access to high-speed rail, improvements in our public park service, revival and product diversification for the postal service, and an increase in general services across the economy. At the state level, we anticipate the states to undertake major infrastructure investment projects, as well as projects to improve the services they offer to their citizens. At the local level, we expect communities to undertake community development projects, provide universal daycare, maintain and upgrade their public school facilities, and improve and expand the services provided by their libraries."

They envision that workers would be paid a starting hourly wage of of $11.56 per hour, plus health and retirement benefits. The program would have some room for promotions and pay raises, so they envision that the average wage about 35% above that level. Total cost of course depends on  how many people would come looking for these jobs. But their estimates for a time of fairly low unemployment, like July 2016 the costs could run $651 Billion to $2.1 trillion. On the other hand, anyone who takes this kind of job would have reduced eligibility for other kinds of government assistance: for example, they would no longer get Medicaid.  

As they emphasize, this job guarantee would be most useful to those who have the hardest time finding a job now. Moreover, the guaranteed federal job would become a floor for the rest of the labor market: if a private employer wanted to hire someone, you would need to offer at least as much as the federal job guarantee. Although they don't emphasize this point, it would be interesting to live in a US society where no one would be ever be able to say that they just can't find a job. 

I tend to be an incrementalist at heart, so both of these proposals stretch beyond my comfort level. I'm OK with the idea of a child allowance for a majority of families with children, but the "universal" part goes a little too far for me. The authors offer a number of choices that would hold down costs, and I'd be looking for more ways to do that. 

It would be fascinating to watch the politics of a job guarantee program evolve. There would certainly be concerns from a wide array of workers--from construction unions to day care workers-- that the government would use the cheaper guaranteed jobs to cut back on wages. Politicians would bid for votes by offering higher pay to the guaranteed job workers. They authors argue that concerns over phantom workers collecting paychecks are overblown, but I"m not so sure. Ultimately, I'm more comfortable with targeted job subsidies for employers (as discussed in other chapters). 

But whatever my specific preferences, these essays are the intellectual equivalent of splashing your face with cold water first thing in the morning. They offer a useful jolt and a wake-up call about what the shape of a serious anti-poverty agenda. 

Table of Contents with links:

Volume 4, Number 2

"Anti-poverty Policy Innovations: New Proposals for Addressing Poverty in the United States," by
Lawrence M. Berger, Maria Cancian, Katherine Magnuson (4:2, pp. 1–19)

"A Universal Child Allowance: A Plan to Reduce Poverty and Income Instability Among Children in the United States," by H. Luke Shaefer, Sophie Collyer, Greg Duncan, Kathryn Edin, Irwin Garfinkel, David Harris, Timothy M. Smeeding, Jane Waldfogel, Christopher Wimer, Hirokazu Yoshikawa (4:2, pp. 22–42)

"Cash for Kids," by Marianne P. Bitler, Annie Laurie Hines, Marianne Page (4:2, pp. 43–73)

"A Targeted Minimum Benefit Plan: A New Proposal to Reduce Poverty Among Older Social Security Recipients A Targeted Minimum Benefit Plan," by Pamela Herd, Melissa Favreault, Madonna Harrington Meyer, Timothy M. Smeeding (4:2, pp.74–90)

"Reforming Policy for Single-Parent Families to Reduce Child Poverty," by Maria Cancian, Daniel R. Meyer (4:2, pp. 91–112)

"Reconstructing the Supplemental Nutrition Assistance Program to More Effectively Alleviate Food Insecurity in the United States." by Craig Gundersen, Brent Kreider, John V. Pepper (4:2, pp. 113–130)

"A Renter’s Tax Credit to Curtail the Affordable Housing Crisis," by Sara Kimberlin, Laura Tach, Christopher Wimer (4:2, pp. 131–160)

"The Rainy Day Earned Income Tax Credit: A Reform to Boost Financial Security by Helping Low-Wage Workers Build Emergency Savings," by Sarah Halpern-Meekin, Sara Sternberg Greene, Ezra Levin, Kathryn Edin (4:2, pp. 161–176)

Volume 4, Number 3

"Anti-poverty Policy Innovations: New Proposals for Addressing Poverty in the United States," by Lawrence M. Berger, Maria Cancian, Katherine Magnuson (4:3, pp. 1–19)

"Coupling a Federal Minimum Wage Hike with Public Investments to Make Work Pay and Reduce Poverty," by Jennifer Romich, Heather D. Hill (4:3, pp. 22–43)

"A Path to Ending Poverty by Way of Ending Unemployment: A Federal Job Guarantee," by Mark Paul, William Darity Jr., Darrick Hamilton, Khaing Zaw (4:3, pp. 44–63)

"Working to Reduce Poverty: A National Subsidized Employment Proposal," by Indivar Dutta-Gupta, Kali Grant, Julie Kerksick, Dan Bloom, Ajay Chaudry (4:3, pp. 64–83)

"A “Race to the Top” in Public Higher Education to Improve Education and Employment Among the Poor," by Harry J. Holzer (4:3,  84–99)

"Postsecondary Pathways Out of Poverty: City University of New York Accelerated Study in Associate Programs and the Case for National Policy," by Diana Strumbos, Donna Linderman, Carsosn C. Hicks (4:3, pp. 100–117)

"A Two-Generation Human Capital Approach to Anti-poverty Policy," by Teresa Eckrich Sommer, Terri J. Sabol, Elise Chor, William Schneider, P. Lindsay Chase-Lansdale, Jeanne Brooks-Gunn, Mario L. Small, Christopher King, Hirokazu Yoshikawa (4:3, pp. 118–143)

"Could We Level the Playing Field? Long-Acting Reversible Contraceptives, Nonmarital Fertility, and Poverty in the United States." by Lawrence L. Wu, Nicholas D. E. Mark (4:3, pp. 144–166)

"Assessing the Potential Impacts of Innovative New Policy Proposals on Poverty in the United States," by Christopher Wimer, Sophie Collyer, Sara Kimberlin (4:3, pp. 167–183)

Tuesday, February 20, 2018

Pollutant Taxes on Energy: Why So Focused on Roads?

Most countries of the world tax oil products, especially the gasoline used in the road sector, but impose only very low taxes on other fossil fuels.  The OECD compiles a Taxing Energy Use Database that includes energy use and energy taxes for 42 countries that make up 80% of global energy use, and not coincidentally, 80% of global carbon emissions. For the latest iteration of this database, the OECD has also published Taxing Energy Use 2018: Companion to the Taxing Energy Use Database (February 2018), which pulls together some of the overall patterns. Here are a couple of the figures that caught my eye.

This figures shows energy taxes on a country-by-country basis. The energy taxes are measured in terms of euros per ton of carbon dioxide emitted. The little horizontal notches show the total tax on carbon emissions from energy use. Switzerland, Luxembourg, Germany, and Norway have the highest taxes, while the US and China are down at the low end,along with Brazil, Indonesia, and Russia. The variation across countries is considerable.

The dark blue balls show the tax on oil products, including gasoline. As is quickly apparent, the effective tax rate on carbon emissions from oil is higher than the tax rate on carbon emissions from other sources of energy. In particular, coal goes essentially untaxed in most countries. As a result, the OECD finds that 81% of carbon emissions are not taxed at all.

Here's a similar story, but told in terms of sectors of the economy. The first section of the table on the left shows taxing of energy in the road sector, and the blue lines show carbon taxes on diesel and gasoline. But the next sections show energy taxes in industrial uses, in residential/commercial, and in electricity generation. From a global perspective, energy pollution arising from these other sources is largely untaxed.

If burning fossil fuels is enough of an environment problem that it justifies taxes on oil products in the road sector, then it seems quite peculiar to have burning of fossil fuel from other sectors going essentially untaxed. Indeed, there is a literature on the "co-benefits" of reducing air pollution, which points out that there are immediate short-term health gains to doing so, as well as a longer-term reduction  in the risks posed by carbon emissions.

Monday, February 19, 2018

Some Patterns for Same-Sex Households

A couple of decades back, it was  hard to find systematic and reliable information on the economic and family characteristics of same-sex couples. However, the US Census has been collecting baseline data for some years now, and just released an annual report, Characteristics of Same-Sex Couple Households: 2005 to Present. The report is just a few statistical tables. I've taken one of the tables, cut some of the rows, left out the columns showing statistical significance, and cut the footnotes. But there's enough left to note some patterns.

  • For the US as a whole, The Census folks counted 56.4 million married opposite-sex couples, 6.8 millions unmarried opposite sex couples, and almost 900,000 single-sex couples, more or less evenly split between male-male and female-female couples. 
  • By average age, the same-sex couples are much closer to the opposite-sex couples than to the unmarried opposite-sex couples. 
  • Same-sex couples are much more likely to be interracial than married opposite-sex couples, especially male-male couples. 
  • Same-sex couples tend to have higher education levels than opposite-sex couples, who in turn have  higher education levels than unmarried opposite-sex couples. 
  • In terms of employment, unmarried opposite-sex couples rank highest, followed by the same-sex couples, while married single-sex couples are lowest. 
  • Married and unmarried opposite-sex couples are about equally likely to have children in the household, while same-sex couples--especially male-male couples--are much less likely to have children in the household. 
  • In terms of median household income, the rank from highest to lowest is: male-male couples, married opposite-sex couples, female-female couples, and unmarried opposite-sex couples. 

A table like this one is useful for showing some factual patterns, but it would be extremely unwise to draw any conclusions about causality from it. For example, it is certainly not true that if the unmarried couples were to marry, they would immediately become older, better educated, and with higher paychecks.

A decade ago, Dan A. Black, Seth G. Sanders, and Lowell J. Taylor. wrote about "The Economics of Lesbian and Gay Families." in the Spring 20017 issue of the Journal of Economic Perspectives (21:2,  53-70). They noted that many of the observed patterns of same-sex couples are consistent with economic reasoning. For example, if a smaller share of same-sex couples are likely to have children, this will influence patterns of work, willingness to live in urban areas, and other factors. They wrote:
"The economic approach to thinking about families—with its focus on deliberative choices made by people with reasonably stable preferences—stresses the importance of constraints. That is, when economists seeks to understand systematic differences in the behavior of gays, lesbians, and heterosexuals, we do not start with a hypothesis of innate differences in preferences, but instead seek to understand how differences in constraints systematically alter incentives faced by gay, lesbian, and heterosexual people. This paper uses the economic approach to organize our thinking about gay and lesbian families, and thus implicitly assumes that, aside from sexual preference, other preferences do not systematically differ by sexual orientation. Based on that approach we provide evidence pertaining to some initial questions. 
"For example, do differing biological constraints faced by gay, lesbian, and heterosexual couples affect choices over children? Clearly they do; there are far fewer children in lesbian and gay families than heterosexual-partnered families. Gays and lesbians also face higher costs for adoption, which further reduces opportunities to raise children. 
"Do differences in fertility (or anticipated fertility), again owing to differences in constraints, influence where people live? We argue that because gay couples face a relatively high price for children, they will consume more non-child goods, and this increased consumption often takes the form of locating in expensive highamenity locations like San Francisco or New York. 
"Do same-sex couples have patterns of household specialization that differ in predictable fashion from heterosexual couples? Available evidence indicates that lesbian women have higher wages and greater labor force attachment than heterosexual women, while the opposite situation pertains for gay men relative to heterosexual men. A variant of Becker’s (1991) model of household specialization would predict this pattern. 
"Of course, many other interesting and fundamental questions await analysis, from economics and other social science disciplines, as better data sources become available."

"The Great Advantage of the Americans Consists in Their Being Able to Commit Faults Which They may Afterward Repair"

Why is it that the United States (or democracies in general) can in many cases pass foolish bad laws or make a  misguided selection of leaders--but nonetheless continue over time to flourish over a sustained time? Alexis de Tocqueville tackles that question in this passage from his 1840 work Democracy in America (Chapter XIV: Advantages American Society Derive From Democracy – Part I, available various places on the web like here and here).  It's food for thought for today's President's Day holiday.

Tocqueville argues that aristocracies "are infinitely more expert in the science of legislation" than democracy and also that those " who are entrusted with the direction of public affairs in the United States are frequently inferior, both in point of capacity and of morality, to those whom aristocratic institutions would raise to power." But in Tocqueville's view, these problems are more than counterbalanced by the fact that democracy over time is responsive to "the well-being of the greatest possible number," and that a democracy has checks and balances. From this perspective, Tocqueville offers one of his famous lines: "[T]he great advantage of the Americans consists in their being able to commit faults which they may afterward repair." Here's the full passage:
"Democratic laws generally tend to promote the welfare of the greatest possible number; for they emanate from the majority of the citizens, who are subject to error, but who cannot have an interest opposed to their own advantage. The laws of an aristocracy tend, on the contrary, to concentrate wealth and power in the hands of the minority, because an aristocracy, by its very nature, constitutes a minority. It may therefore be asserted, as a general proposition, that the purpose of a democracy in the conduct of its legislation is useful to a greater number of citizens than that of an aristocracy. This is, however, the sum total of its advantages.
"Aristocracies are infinitely more expert in the science of legislation than democracies ever can be. They are possessed of a self-control which protects them from the errors of temporary excitement, and they form lasting designs which they mature with the assistance of favorable opportunities. Aristocratic government proceeds with the dexterity of art; it understands how to make the collective force of all its laws converge at the same time to a given point. Such is not the case with democracies, whose laws are almost always ineffective or inopportune. The means of democracy are therefore more imperfect than those of aristocracy, and the measures which it unwittingly adopts are frequently opposed to its own cause; but the object it has in view is more useful.
"Let us now imagine a community so organized by nature, or by its constitution, that it can support the transitory action of bad laws, and that it can await, without destruction, the general tendency of the legislation: we shall then be able to conceive that a democratic government, notwithstanding its defects, will be most fitted to conduce to the prosperity of this community. This is precisely what has occurred in the United States; and I repeat, what I have before remarked, that the great advantage of the Americans consists in their being able to commit faults which they may afterward repair.
"An analogous observation may be made respecting public officers. It is easy to perceive that the American democracy frequently errs in the choice of the individuals to whom it entrusts the power of the administration; but it is more difficult to say why the State prospers under their rule. In the first place it is to be remarked, that if in a democratic State the governors have less honesty and less capacity than elsewhere, the governed, on the other hand, are more enlightened and more attentive to their interests. As the people in democracies is more incessantly vigilant in its affairs and more jealous of its rights, it prevents its representatives from abandoning that general line of conduct which its own interest prescribes. In the second place, it must be remembered that if the democratic magistrate is more apt to misuse his power, he possesses it for a shorter period of time. But there is yet another reason which is still more general and conclusive. It is no doubt of importance to the welfare of nations that they should be governed by men of talents and virtue; but it is perhaps still more important that the interests of those men should not differ from the interests of the community at large; for, if such were the case, virtues of a high order might become useless, and talents might be turned to a bad account. ... The advantage of democracy does not consist, therefore, as has sometimes been asserted, in favoring the prosperity of all, but simply in contributing to the well-being of the greatest possible number.
"The men who are entrusted with the direction of public affairs in the United States are frequently inferior, both in point of capacity and of morality, to those whom aristocratic institutions would raise to power. But their interest is identified and confounded with that of the majority of their fellow-citizens. They may frequently be faithless and frequently mistaken, but they will never systematically adopt a line of conduct opposed to the will of the majority; and it is impossible that they should give a dangerous or an exclusive tendency to the government.
"The mal-administration of a democratic magistrate is a mere isolated fact, which only occurs during the short period for which he is elected. Corruption and incapacity do not act as common interests, which may connect men permanently with one another. A corrupt or an incapable magistrate will not concert his measures with another magistrate, simply because that individual is as corrupt and as incapable as himself; and these two men will never unite their endeavors to promote the corruption and inaptitude of their remote posterity. The ambition and the manoeuvres of the one will serve, on the contrary, to unmask the other. The vices of a magistrate, in democratic states, are usually peculiar to his own person."

Friday, February 16, 2018

Homeownership Rates: Some International Comparisons

High-income countries vary considerably in the share of households that own their own homes, The US rate of homeownership was about average by international standards 20-25 years ago, but now is below the average. Here are some facts from Laurie S. Goodman and Christopher Mayer, "Homeownership and the American Dream" in the Winter 2018 issue of Journal of Economic Perspectives (32:1, pp. 31-58).
"The United States does not rank particularly high among other high-income countries when it comes to homeownership. Table 1 compares the homeownership rate from 1990 to 2015 across 18 countries where we have been able to obtain somewhat comparable data over the entire time period. The United States was ranked tenth in 1990, at the middle of the pack and close to the mean rate. By 2015, the United States was the fifth-lowest, its homeownership rate of 63.7 percent falling well below the 18-country average of 69.6 percent. Over the 1990–2015 period,  13 of the 18 countries increased their homeownership rates. The five countries with declines in homeownership were Bulgaria, Ireland, Mexico, the United Kingdom—and the United States.
"In a broader sample of countries, many of which have missing data for some of the years in question, the United States homeownership rate in 1990 was slightly below the median and mean of the 26 countries reporting data. By 2015, the US ranked 35 of 44 countries with reliable data, and was almost 10 percentage points below the mean homeownership rate of 73.9 percent."

There are a lot of possible reasons for this variation, including "culture, demographics, policies, housing finance systems, and, in some cases, a past history of political instability that favors homeownership." They offer an interesting comparison of how homeownership rates in the UK and Germany evolved after World War II (citations and footnotes omitted):
"For example, consider the evolution of homeownership in (the former) West Germany and the United Kingdom. Both countries pursued a similar policy of subsidizing postwar rental construction to rebuild their countries. However, in intervening years, German policies allowed landlords to raise rents to some extent and thus finance property maintenance while also providing “protections” for renters. In the United Kingdom, regulation strongly discouraged private rentals, whereas the quality of public (rental) housing declined with undermaintenance and obtained a negative stigma. As well, German banks remained quite conservative in mortgage lending. The result was that between 1950 and 1990, West German homeownership rates barely increased from 39 to 42 percent, whereas United Kingdom homeownership rates rose from 30 to 66 percent. Interestingly, anecdotes suggest that many German households rent their primary residence, but purchase a nearby home to rent for income (which requires a large down payment but receives generous depreciation benefits). This allows residents to hedge themselves against the potential of rent increases in a system that provides few tax subsidies to owning a home."
By international standards, the US has had fairly generous mortgage interest deductions. Moreover, Goodman and Mayer walk though the question of whether owning a home in the US typically makes financial sense. Of course, buying a home at the peak of hosing prices circa 2006 and then trying to sell that home in 2008 is a losing proposition. But they argue that if Americans are buying a home at a typical price and willing and able to hold on to the home for a sustained time--say, buying in 2002 and holding on through 2015 or later--then housing pays off pretty well in comparison to alternative investments. They write:
"Our results suggest that there remain very compelling reasons for most American households to aspire to become homeowners. Financially, the returns to purchasing a home in a “normal” market are strong, typically outperforming the stock market and an index of publicly traded apartment companies on an after-tax basis. Of course, many caveats are associated with this analysis, including variability in the timing and location of the home purchase, and other risks and tradeoffs associated with homeownership. There is little evidence of an alternative savings vehicle (other than a government-mandated program like Social Security) that would successfully encourage low-to-moderate income households to obtain substantial savings outside of owning a home. The fact that homeownership is prevalent in almost all countries, not just in the United States, and especially prevalent for people near retirement age, suggests that most households still view homeownership as a critical part of a life-cycle plan for savings and retirement."
Thus, owning a house is a kind of self-discipline that encourages saving. Also, buying a house in which to live is an investment that offers two kinds of returns: both the financial return when you sell, but also the fact that you can live inside your owner-occupied house, but not inside a stock portfolio.